Today we are going to look at Commvault Systems, Inc. (NASDAQ:CVLT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Commvault Systems:
0.067 = US$33m ÷ (US$815m - US$318m) (Based on the trailing twelve months to December 2018.)
So, Commvault Systems has an ROCE of 6.7%.
Is Commvault Systems's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Commvault Systems's ROCE is meaningfully below the Software industry average of 9.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Commvault Systems's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Commvault Systems has an ROCE of 6.7%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Commvault Systems.
Do Commvault Systems's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Commvault Systems has total liabilities of US$318m and total assets of US$815m. Therefore its current liabilities are equivalent to approximately 39% of its total assets. Commvault Systems has a medium level of current liabilities, which would boost its ROCE somewhat.
What We Can Learn From Commvault Systems's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course you might be able to find a better stock than Commvault Systems. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.